Fiscal policy, international spillovers, and endogenous productivity
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Date
2021
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Abstract
The paper presents empirical evidence on the international effects of US fiscal
policy from structural vector autoregressions identified through external instruments in a
panel setting for the G7 countries. An exogenous increase in US government spending is
estimated to produce sizeable positive responses of output and consumption in the rest of
the G7 countries, both about half as large as their domestic US counterparts, while strongly
depreciating the US terms of trade and lowering short-run real interest rates. Moreover,
fiscal shocks are estimated to have a strongly positive impact on hourly labor productivity
in the private sector. We solve a two-country New Keynesian model in closed form and
show that a low cost elasticity of varying technology utilization can simultaneously explain
the positive productivity, consumption and international spillover effects as well as the real
depreciation resulting from expansionary US government spending shocks.
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Keywords
international transmission of fiscal shocks, proxy-vector autoregressions, terms of trade, labor productivity, government spending